Although ARM reported a drop in royalty payments for its embedded chip designs, the company reported an increase in licensing revenues and a healthy boost in the chips it sells into smartphones, including the first 64-bit sales.

ARM, whose chips power the smartphone market and increasingly a number of other product areas as well, reported profits before tax of 78 million pounds, up 16.2 percent year over year. Revenue was 186.7 million pounds, up about 10 percent.

ARM mainly makes money in two ways: from licensing the designs to companies like Broadcom, Marvell, and Qualcomm, which pay ARM for the rights to build either predefined or custom chips based on ARM silicon. Those companies then usually pay ARM additional royalty fees on a per-chip basis. ARM, which reported its earnings in a mix of dollars and pounds, said that licensing revenues increased 37 percent year over year to $129.9 million, which royalty revenues were up 3 percent to $144.5 million.

The lower royalty numbers had prompted concerns that end customers were beginning to prefer cheaper smartphones, with a ripple effect that would in turn hurt ARM's profits as customers bought and sold processors based on ARM's cheaper, lower-margin designs. That's true, ARM executives acknowledged. But ARM said that of the six licenses it sold in the quarter, five were for the A-series chips that appear in high-end smartphones, and that it had seen over 30 percent unit growth in the A-series line.

64-bit ARM chips ship

Perhaps more importantly, ARM said it had begun receiving royalty revenue from the first high-volume shipments of ARMv8-A-processor-based chips during the first quarter, an important step forward for its high-end processor lineup.

ARM first launched the 64-bit ARM V8 architecture in 2011, providing the foundation for development of the 64-bit cores themselves. Those chips, the ARM Cortex A57 and A53, launched in 2012. In 2013, licensees like Marvell, Mediatek and Qualcomm began talking up their own plans to produce those chips by the second half of 2014. AMD chief executive Rory Read said last week that his company's 64-bit ARM chips, designed for the server market, had begun sampling and would ship by the end of 2014.

All told, ARM has signed about 30 licenses for the V8 architecture, executives said. After licensees design the new chips, they'll begin manufacturing them, enabling a 64-bit transition in the phone and tablet market that will mirror the PC's own transition some years ago. Then 64-bit phones and tablets should also ship, possibly by the end of 2014 or early 2015.

"[T]hose devices will take time to conclude, they will take time to get into products, take time to ship," Simon Segars, ARM's chief executive, told analysts during a conference call Wednesday. "But I think we’re in good track in generally in terms of the deployment of those version 8 of the architecture."

ARM chief financial officer Tim Score also said that he had seen "more data points" indicating that the smartphone market would see a stronger second half than the end of 2013.

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